NEW YORK, NY – August 10, 2018
So everything in the markets seemed to be going pretty well last week. Equity markets were trading mostly higher, Treasury yields and commodity prices seemed contained, and, for the most part, the typical political and tariff rhetoric we have become accustomed to was quiet. I guess we can say summer vacation season was in full swing, as things seemed rather silent, aside for a few Treasury auctions here and there. The markets had nothing else to do but look ahead with some positive momentum and enjoy some good old extra cash in everyone’s pockets.
However, we faced a bit of a different story Friday morning, as a flight to quality in the Treasury Market has been stirred on the heels of the escalation of financial problems in Turkey and the fears of contagion spilling over to other Eurozone countries. Feels like we have been here before, doesn’t it?
While to many this may seem like a situation where Turkey’s financial woes are comparable to them being our “father’s, brother’s, cousin’s, nephew’s, friend’s, former roommate’s,” the reality is whenever contagion fears of financial meltdown take place anywhere globally, markets around the world will react accordingly, which is what we are witnessing this AM.
Friday morning, 10-year Treasury yields were trading as low as 2.86% before trading back up to 2.90% – down from the weekly highs of 2.98% earlier in the week. The bias trend for a flatter and eventually inverted yield curve continues with the 2-year Treasury now sitting at 2.63% and the 2- to 10-year spread now inside 30bps – the tightest level since the curve inverted in 2006/2007.
Over in our markets, it’s early August and it certainly does feel like it, with the number of out of office messages being received. Despite this, the market and competition for commercial real estate loans continue to be extremely hot, with no slowdown in sight as lenders continue to quote extremely aggressive terms on almost any transaction they can lay their hands on. Banks, Life Co’s, CMBS, and others continue to remain in the mix despite historical expectations of a pullback at this time of year for many. Given the competition, both Fannie Mae and Freddie Mac remain competitive for the right transactions, although we continue to stress that transactions that count a decent chunk against the FHFA scorecard cap and those where sponsors may have limited to no Agency background are likely not to receive the preferential treatment folks would like to see in this market.
Either way, it is clear that the competitive terms currently quoted out in the market pretty much since the beginning of the year are here to stay – the fact that FNMA has still not completely repriced its delegated S&G grid to current market standards remains baffling. A wakeup call and reality check are certainly in order. (Though this is just me rambling on and venting at this point.)
On the secondary market front, there was tame supply in New Issue DUS this week as expected for this time of year, and given the reduction in supply, demand was hotter out on the street and spreads on Primary DUS tightened roughly 2-3bps this week. In addition, Freddie Mac priced two CME deals out in the market, their latest 10-year Fixed Rate and 7-year Floating Rate securitizations. The 10-year Fixed performed well with the A2 10-year average life bonds being scooped up at Swaps plus 53bps. The basis now between 10-year DUS and Freddie K’s is about 3-5bps, which is historically low. Typically, that should run about 8bps. Therefore, either Freddie K’s tighten from here or DUS widens. We shall see. Hoping for the former.
The 7-year Floater priced in at LIBOR plus 34bps and pretty much in line with expectations and hopefully granting some much-needed stability into a floating rate market that has suffered severely over the last few weeks. As we head into the end of summer, new issue supply is expected to remain weak which is typical for this time of year. This may drive spreads down further as investors compete for new positions.
On the GNMA front with the positive momentum in overall Agency CMBS, spreads on project loans have stabilized after weeks of widening and seem to have found firm footing. For now, investors are back in the fold looking into the Ginnie Mae Remic product as alternatives to other investments, a positive for the market. In big sister CMBS land, two multi-borrower transactions priced this week. One from UBS and the other Credit Suisse. Both deals priced in line with expectations with the UBS deal getting hit a bit harder given the lack of a larger Wall Street bank on the deal and overall collateral credit quality concern.
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